Funding of private pensions

The Malta Institute of Management is concerned about the pensions issue in Malta.

Increasing the retirement age should be the last thing to consider, as different needs arise for people at a certain age. It is unfair for people contributing all their working life to find themselves having to continue working despite their specific necessities.

While MIM feels that encouraging the elderly to remain productive and to share their experiences with the younger generations may be healthy to some and is definitely a right, this should be totally voluntary.

Many professionals are choosing to further their careers but want the necessary assurance of a pension, as many do reduce their working hours.

The first step is to incentivise people to contribute to a third pillar, which is totally voluntary, and to encourage employers to contribute to that pillar. Malta in the past had tax exemptions which were lost for various reasons.

The institute recommends that the government considers reintroducing similar or different incentives. However, this needs to be done with responsibility and with proper education that allows for contributors to understand the schemes they are investing in.

It is a fact that many contributors in foreign schemes were victims of wrong investment strategies. Malta is not immune to this and was subject to investors suffering due to inappropriate information.

Pension schemes should be strictly regulated and monitored by the appropriate authorities, who should be in a position to question the investment strategy and the effective communication provided to contributors.

The ring-fencing of the contributions paid today is no longer an option. The government should be committed to ring-fence the contributions fund. This has been postponed from one administration to the other, with no administration making the difference in the management of such funds.

The common reason given not to start this ring-fencing process is that there is no identification of such funds or that there are no funds available. The government should consider establishing the fund through an interest-free loan to start operating.

The fund should be co-managed by the government and the private sector. The fund should actually invest itself to ensure the necessary income for pensioners.

It must be a prudent and conservative investment strategy, possibly in activities within the Maltese economy. All current and future contributions or a considerable part of them would go towards the ring-fenced commercially managed fund.

The funds for such an interest-free loan may be generated through alternative financing methods existent and used in many countries. Unfortunately, such alternative measures do not seem to be on the agenda of government representatives.

Within the current business and economic environment, it is also unthinkable and unimaginable to add further costs to employees or employers with an obligatory second pillar. MIM has already expressed concern on the second pillar, particularly if contributors’ money is diluted through administration costs in multiple schemes, and on the risks this may bring with it.

There is also the problem of the portability of contributions when one changes jobs, which is normal especially within SMEs. This could be an administrative nightmare considering the thousands of small and micro enterprises, and could lead to prohibitive administration costs.

Furthermore, through adequate actuarial analysis it may result that the amount of contributions needed for such a fund to function may be prohibitive and may damage Malta’s competitiveness. In this context, the second pillar option is not really an option.

However, there may be other options Malta could adopt to ensure a fair and serene retirement respecting human dignity. The various options should come out of a detailed analysis of the saving patterns of the Maltese.

This may give rise to innovative ways to ensure a decent living at retirement age. The institute, however, recognises the difficulty of such an exercise due to drastic changes in such patterns and lack of appropriate primary source data.

The MIM also recommends that a Permanent Commission for the Review of Pensions (not the Pensions Working Group) is introduced to constantly monitor and suggest improvements over the years. This commission should be made up of representatives from various sectors.

The pensions issue cannot, in any way, be polarised by the political parties and all resources and energies, including those of professional bodies and social partners, should be used to find long-term sustainable pension for the foreseeable future.

www.maltamanagement.com

This article was written for and on behalf of the Malta Institute of Management.